Category Archives: Hostile

Well, “zombie shares” caught my eye. I clicked on the article in the online magazine “Growth Capitalist” to find out just what are “zombie shares”.

Zombies, as I understand it, are the dead reanimated and controlled by someone through witchcraft. Zombies move and react to their surroundings like they are alive but, in reality, they are not.

So, I presume that, “zombie shares” are shares of stock that look like normal shares but, in reality, are different. In the example that follows, you’ll see that “zombie shares” may look like they’re still outstanding and held by the shareholder of record but, in reality, they are not.

In the “Growth Capitalist” article, the “zombie shares” are shares that have effectively been repurchased by and now voted by the issuing company but are left outstanding in the hands of the prior owner to permit the shares to be counted in shareholder votes. So, they’re “zombie shares”.

I mentioned something like this in prior posts on M&A defense such as “M&A Defense Checklist”. In that context, however, a hostile investor would obtain effective voting control or effective ownership without tripping the definition of ownership to trigger a “poison pill” or 13(d) disclosure. A hostile party, therefore, could control many more shares than its visible ownership would indicate.

As a follow-up to my recent posts on the 2012 proxy season entitled, “Silent Majority Speaks” and “Just a Small Leak“, I’d like to pass along to you a website that provides valuable information about corporate proxies.

This website, I’m pleased to report, will not likely cause your eyes to glaze over with boredom.

Created by Equilar, the compensation consulting company that I’ve mentioned in prior posts, this website presents short and informative videos on corporate proxy issues.

Roche’s hostile offer for Illumina is a great case study to follow up my post “M&A Defense Checklist” and to prove that old adage that “the devil’s in the details”.

The Roche hostile offer for Illumina highlights two of my points,

Now there is higher risk of hostile activity for all companies. Illumina, before the offer, was trading at 4x revenue and 14x EBITDA: not what you’d consider a low valuation target although its stock at $37.69 was below its 52 week high of $79.40.

Companies should carefully review their M&A defenses to uncover and potentially fix any weaknesses before an aggressor uses them against the company.

As background on this case, after what appears to be a short courtship period, Roche launched a hostile tender offer to shareholders to buy Illumina at $44.50/share an 18% premium to Illumina’s closing price the day before the offer. Roche also announced that it intends to wage a proxy battle which would result in its slate of nominees comprising a majority of the Illumina board.

In this post, I highlight key points from an impressive article entitled “The Chink in Illumina’s Defense” by Steven M. Davidoff, writing as The Deal Professor, a commentator for the New York Times’ “DealBook”. The article speculates that Roche’s proxy battle strategy will likely include proposals to:

Nominate board candidates for the 4 seats up for election this year;

Propose a by-law amendment to expand the size of the board by two members to 11 and nominate those two board candidates; and

Propose a shareholder vote to remove all of Illumina’s board without cause.

Illumina’s defenses include:

Staggered board of nine members with only 4 up for election this year;

Supermajority vote of 67% of all shares outstanding required to amend a by-law;

Shareholders can’t call a special meeting;

Shareholders can’t act by written consent; and

Poison pill which had expired in 2011 but could be reinstated by board action alone.

Proving that time-tested maxim, “the devil’s in the details”, here’s what we might learn from issues with Illumina’s defenses that Roche may be exploiting according to “The Chink in Illumina’s Defense”.

Certain key elements of Illumina’s defenses are contained in its by-laws, not as charter provisions. A corporate provision contained in a company’s by-laws may be amended by shareholder action without board action. In contrast, a provision in a company’s charter requires approval by both the board and shareholders.

Illumina’s by-laws specify the size of the board which Roche is proposing to expand by two to eleven members of which Roche’s slate of 6 would constitute a majority. Shareholders can approve, albeit by 67%, this by-law amendments to expand the board without board approval.

Illumina’s by-laws also permit removal of board members without cause upon approval by a simple majority of the votes cast at the meeting, a relatively low threshold. Delaware law requires the provision for removal of board members without cause to be in a company’s charter so this provision will, no doubt, trigger litigation as to its validity and usefulness in Roche’s attack.

Illumina’s advance notice provision for submission of proxy proposals to be included for consideration at its annual meeting requires only 90 days vs longer periods which are common. As a result, Illumina has less time to respond before its annual shareholder meeting.

Subsequent to Roche’s offer, Illumina’s share price rose well above Roche’s offer price signaling that Wall Street thinks Illumina is worth more than Roche’s offer. Also, Illumina reinstated its poison pill at a 15% threshold with updated definitions of beneficial ownership to include ownership through derivatives.

To read Roche’s offer letter to Illumina, click here or go to www.sec.gov for the recent documents filed under Illumina including its poison pill and various filings by both sides.

Well, no sooner did I post “It’s Déjà Vu All Over Again” than I started getting requests for suggestions of what to include on a company’s M&A defense checklist.

You know, it’s simply good practice for a company to periodically review its M&A defenses.

But now, the task of reviewing a company’s M&A defenses takes on greater urgency. The risk of a company getting an unsolicited offer is higher than usual now because many large companies are loaded with cash but short on revenue growth.

So what would I recommend for the checklist?

Please understand, I’m not necessarily recommending implementation of these provisions but rather suggest they be on your company’s M&A defense review list.

First on my list is a recent hot topic – proxy access rules and advance notice bylaw provisions. Public companies should be aware of recent developments and consider updating to what’s known as “second generation” provisions.

Next on my list would be a couple charter provisions which slow aggressors. These would be (i) restrictions on a shareholder’s ability to call a special meeting, and (ii) a prohibition on shareholder action by written consent.

Of course, we can’t forget the “poison pill” or shareholder rights plan. While poison pills have declined in popularity over the last decade, we’ve seen several recent instances, Barnes & Noble, Airgas and Lions Gate, where a pill has played a key role in a company’s M&A defenses.

Even if you have a pill in place, there are a couple developments to note. One development is the special purpose pill which, for example, may be used to dissuade a shareholder from triggering tax law change of ownership provisions which impairs use of a company’s net operating loss. The second development involves expanding the definition of beneficial ownership to include sophisticated new forms of corporate ownership now available.

Another checklist item would be the classified or “staggered” board, where only a portion of the board members, typically a third, are up for shareholder vote each year. This slows an aggressor’s efforts to change a board through a proxy battle. A staggered board plus a pill is a powerful defensive combination.

Another defense provision is the supermajority vote which requires a high percentage of shareholders to approve an action, that is, once you’ve got your defense provisions in place.

In contrast, if your company permits cumulative voting, a small but organized minority shareholder group might be able to install a board member despite the group’s small ownership.

Certain states laws permit additional defenses or variations on these provisions. For example, certain states permit what are known as constituency statutes which enable a board to consider the impact of an acquisition on constituencies including employees or the community, rather than just shareholders. Depending upon your state, these extra features may be useful.

I would note here that some defense provisions can be implemented unilaterally by board action. Others require shareholder approval which affects implementation feasibility.

In addition to these items, there are a number of tactical actions like stock buybacks and recapitalizations which can be used defensively in response to or to pre-empt hostile activity.

I recommend that a company set aside time at an upcoming board meeting for a review of its M&A defense provisions. Company management, its attorneys, bankers and IR professionals can brief the board and make recommendations.

I can help your company to review its defenses in a timely and cost efficient manner. It’s better to be prepared.

Those of us who’ve been in the financial markets for a number of years have seen Wall Street prices rise and fall periodically. I can’t predict exactly when they’ll rise or fall but I’m certain they will.

Therefore, when stock prices fall across the board, I don’t panic. I know it’s a cycle; prices will rise again eventually.

Also, experience has taught me that when stock prices fall, public companies should once again pull out and dust off for consideration certain time tested corporate actions.

It’s kind of like pulling out the snow gear this time of year. It’s a ritual.

What kind of corporate actions are appropriate to consider when stock prices drop?

My point is that public companies should consider a buyback program and, if appropriate, follow through.

Next, not to be paranoid, but public companies should review their takeover defenses.

Particularly now when big companies are awash in cash and their organic growth has slowed, big companies may see acquisitions as a smart means to get growth by putting their cash to work. Heaven knows, cash earns nothing sitting in the bank.

There’re a number of common takeover defenses, some which vary depending upon the company’s state of incorporation. Common defenses include poison pills, staggered boards, shareholder vote submission and vote threshold provisions.

What I’m recommending here is that a company review with its Board, attorneys, investment bankers and IR professionals just what’s appropriate for the company given its circumstances.

Third, be proactive about M&A.

Rather than sit back and wait for a suitor to call, go ahead, evaluate your competition and all the adjacent players, those companies which are not direct competitors but are nearby. Make sure your analysis includes all the global players too. It’s a very small world now.

For companies operating in several businesses, you really must evaluate each business independently. Who knows, this might even lead to a split-off like that of ITT and Sara Lee.

The goal of this analysis is to determine where there are good fits with your company, where one plus one equals three or more. Even if you don’t immediately act on the analysis, you’re better off knowing the landscape if a suitor calls.

While you’re looking at alternatives, you should consider whether a “go private” or “go dark” transaction makes sense for your company. Unfortunately, for many companies, the cost of being public outweighs the benefits.

I can help your company to consider all these actions in a timely and cost efficient manner .

Maybe because this M&A defense provision doesn’t enjoy a colorful name like a “poison pill”, the recent battle waged over proxy rules for selecting board members and determining many critical M&A corporate governance provisions went largely unnoticed except by a small band of M&A specialists.

The side of this battle, described as defense, would likely claim victory because it succeeded in judicially thwarting a measure by the SEC to mandate a set of procedures to clarify and standardize the proxy proposal submission rules known as “advanced notice bylaw and proxy access rules”.

See what I mean about the catchy name?

What was left standing after the fierce battle were provisions which permit shareholders to submit proposed proxy provisions for a vote by shareholders. Shareholders, therefore, can propose proxy proposal submission rules to address what was in the thwarted SEC mandate.

So the question is, in the next several years, will shareholders seize this opportunity to vote into place proxy proposal submission provisions which are more aggressor friendly than those in the thwarted SEC mandate?

Will slow to no growth in corporate performance trigger more shareholder impatience and activism and, guided by proxy advisory firms like ISS, translate into proxy proposal submission provisions which facilitate changes in underperforming companies’ boards?

Will we look back and see that “the defense” declared victory by defeating the SEC mandates and completely missed what turns out to be a more dangerous development?

The attached post from the law firm of Latham & Watkins provides an excellent discussion of the topic and suggests potential corporate responses. Please click on the link below to download the pdf document.